The short-term rate of return represents the liquidity tightness, and the long-term rate of return represents the economic expectation under the reality of liquidity. Therefore, the difference between the long-term rate of return and the short-term rate of return (term spread) represents the long-term expectation of economic fundamentals.
In fact, most US debt term spreads follow Liquidity:
1) the term spread of US bonds generally follows the trend of liquidity tightness. When liquidity is relaxed, the term spread widens; When the liquidity gap is narrowed, the interest rate will be narrowed;
2) the reason should be: there is a relationship between the long-term economic expectation and the actual liquidity tightness. When the liquidity is tightened, the pessimistic expectation of the fundamentals increased by the market due to the liquidity tightening has additionally thickened the allocation value of the long-end yield. Therefore, the long-end yield is naturally lower than the short-end yield due to the impact of liquidity tightening.
The same is true this time. This round of super flat US bond yield curve stems from the excessive tightening of liquidity, which contains an expectation that if the short-term liquidity is tightened as expected, the economic fundamentals will be unbearable.
However, different from the previous curve upside down, the curve upside down is too early this time, which leads to the short end interest rate of 3M has not increased significantly, and the medium and long end yield has increased significantly driven by expectations, which is related to the very effective expectation management this time, and also leads to the rise of 3m-10y interest rate spread instead of falling.
Just because the warning of upside down of term spread is too early, we don't need to be alert to the US economic recession in a short time:
1) 10y-3m interest rate spread has not narrowed, but 10y-2y has narrowed, which means that even if there is recession expectation in the curve shape, this expectation may not be realized in a short time;
2) in fact, the term spread is not simply a reflection of the expectation of economic fundamentals. The upward short-term yield would have driven the slowdown of economic growth, but empirically, the time difference will take at least one year, while the current short-term yield has just begun to rise.
Objectively speaking, the fundamentals of the US economy are not necessarily poor this year, but it may become more dangerous next year:
1) the US interest rate hike may last for at least one year. In addition to the need to hedge inflation, there is also the need for policy normalization;
2) if the past time difference is pushed back, the recession in the United States may begin next year. There should be no major problems with the fundamentals of the United States this year. Moreover, there is a bonus for discouragedworkers to return to the job market this year.
But if this spring is pressed down, it may not be able to lift up quickly:
1) the flat yield curve price in the United States has a middle or even high interest rate environment. Only when the interest rate drops again can the curve widen again;
2) from this point of view, the yield curve of the United States will only be more flat this year, and the subsequent interest rate spread of 3m-10y will gradually narrow with the advance of interest rate increase.
At least this year, the economic fundamentals and asset style of the United States are risk-on, but the remaining space for the yield of long-end US bonds may not be large. If the United States completes another six interest rate hikes within the year as expected, supplemented by the table reduction plan, 10Y US bonds may not return to the peak at the end of 2018.
Risk tip: monetary policy exceeded expectations and economic recovery exceeded expectations.
